O-LevelAccountingPreparation of financial statements7707/13 · Oct/Nov 2021 · Q101 Mark
At the end of each year, PT Limited transfers 20% of the profit for the year to the general reserve. Draft financial statements were prepared for the year ended 30 September 2021. It was then discovered that the inventory at 30 September 2021 had been overstated by $1500. Which effects did the correction of this error have on retained earnings and general reserve at 30 September 2021?
Aretained earnings: decrease $300, general reserve: increase $300
Bretained earnings: decrease $1200, general reserve: decrease $300
Cretained earnings: increase $300, general reserve: increase $1200
Dretained earnings: increase $1500, general reserve: no effect
✓ Correct answer
B: retained earnings: decrease $1200, general reserve: decrease $300
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